What is the GST Composition Scheme?

The Composition Scheme is a simplified tax compliance mechanism under the Goods and Services Tax (GST) designed for small taxpayers with limited turnover. It allows eligible businesses to pay GST at a flat, lower percentage of their turnover instead of the regular GST rates, with significantly reduced compliance requirements -- fewer returns and no requirement to maintain detailed invoicing records. The scheme is governed by Section 10 of the CGST Act, 2017.

The turnover threshold for opting into the Composition Scheme is an annual aggregate turnover of up to Rs 1.5 crore for manufacturers and traders of goods (Rs 75 lakh for special category states like Arunachal Pradesh, Meghalaya, Mizoram, and Sikkim). For service providers and mixed suppliers, the threshold is Rs 50 lakh of annual turnover. Businesses under this scheme cannot collect tax from customers (i.e., cannot issue tax invoices showing GST separately), cannot claim Input Tax Credit (ITC), and cannot make inter-state supplies.

The scheme was introduced to ease the compliance burden on small businesses and MSMEs, which form the backbone of India's economy. By offering a simplified structure, it encourages formalisation and voluntary registration of small businesses that might otherwise remain outside the tax net.

Key Features

# Feature Details
1 Legal Basis Section 10, CGST Act 2017
2 Turnover Limit (Goods) Up to Rs 1.5 crore (Rs 75 lakh for special category states)
3 Turnover Limit (Services) Up to Rs 50 lakh
4 Tax Rate -- Manufacturers 1% of turnover (0.5% CGST + 0.5% SGST)
5 Tax Rate -- Restaurants 5% of turnover (2.5% CGST + 2.5% SGST)
6 Tax Rate -- Service Providers 6% of turnover (3% CGST + 3% SGST)
7 ITC Cannot claim Input Tax Credit
8 Filing Quarterly statement (CMP-08) + Annual return (GSTR-4)

Current Status / Latest Data

  • Opt-in deadline for FY2025-26: Form CMP-02 was due by 31 March 2025.
  • Filing schedule FY2025-26: Quarterly CMP-08 due by 18th of month following each quarter; Annual GSTR-4 due by 30 April 2026.
  • Restrictions: Composition dealers cannot make inter-state supplies, supply through e-commerce operators, or deal in non-taxable goods (ice cream, pan masala, tobacco).
  • Number of registrants: Approximately 18-20 lakh businesses are registered under the Composition Scheme nationwide.
  • Post-GST 2.0 (September 2025): With the rationalisation of GST slabs to primarily 5% and 18%, the differential benefit of the Composition Scheme remains relevant but narrowed for some categories.
  • E-commerce exclusion: Composition dealers still cannot sell through e-commerce platforms -- a long-standing demand from small businesses remains unaddressed.

UPSC Exam Corner

Prelims: Key Facts

  • Composition Scheme is under Section 10 of CGST Act
  • Turnover limit: Rs 1.5 crore for goods traders/manufacturers; Rs 50 lakh for service providers
  • Tax rates: 1% (manufacturers), 5% (restaurants), 6% (services) on turnover
  • Composition dealers cannot claim ITC or make inter-state supplies
  • Cannot collect tax from buyers (no tax invoice showing GST)
  • Quarterly returns (CMP-08) instead of monthly GSTR-1/3B

Mains: Probable Themes

  1. Evaluate the role of the Composition Scheme in reducing compliance burden on small businesses and promoting formalisation under GST
  2. Discuss the trade-offs involved in the Composition Scheme -- simplified compliance versus loss of ITC and inability to make inter-state sales
  3. Should the Composition Scheme's turnover limit be raised further to cover a larger segment of MSMEs? Analyse the fiscal implications

Sources: ClearTax - GST Composition Scheme, JurisHour - Composition Scheme FY2025-26, Bajaj Finserv - GST Composition Scheme